While the defeat of an insurance bad faith bill is rare, it does happen, and I am a witness to this. Senate Bill 1590, introduced in the February 2016 legislative short session, was the latest attempt to expand bad faith in Oregon through the Legislature, because Oregon courts have consistently declined to enlarge the parameters of bad faith in the state through the common law. I was retained as a lobbyist by the Property Casualty Insurers Association of America and the American Insurance Association to work with their professional lobbyists in opposition to SB 1590. We defeated the bill, to the surprise of many, in a victory for common sense.

SB 1590 wasn’t a good bill, and kudos to Oregon legislators for recognizing this. Here were some of its features:

Estoppel without an ability to cure:

Any breach of the duty to defend, even a minor breach or an honest mistake or oversight, would have resulted in the insurer’s loss of the ability to participate in the defense of the lawsuit while still being forced to pay whatever fees and costs defense counsel charges. Additionally, the insurer would have lost any and all defenses against paying the claim, even if the claim was far outside the coverage of that type of insurance policy.

Any breach of the duty to defend also would have resulted in the insurer’s liability for any judgment or settlement agreed to by the insured and the claimant. This would have encouraged unmeritorious lawsuits and collusive and fraudulent agreements between insureds and claimants.

Even in Washington, where bad faith law is considered very harsh, a breach of the duty to defend must be in bad faith and must cause damages before it is actionable, and an insurer who breaches the duty to defend can usually correct its decision and repair any damage caused. In SB 1590, there was no provision for an insurer to receive a notice of a supposed violation along with an opportunity to cure.

Dangerous fiduciary duty standard:

The fiduciary duty standard imposed in the bill appeared to require an insurer to put its insured’s interests higher than its own – currently, in Oregon, and other states like Washington, insurers must give equal weight to the insured’s interests, but insurers are not required to ignore their own interests by doing things like settling above policy limits, settling unreasonable demands, or paying unmeritorious or unproven liability claims. This provision also could have barred insurers from seeking a declaratory judgment from a court to clarify the insurer’s duty to defend or other duties.

The fiduciary duty standard appeared to create a tort claim and allow for tort damages for alleged insurer breaches while the insurer is defending an insured. Tort damages include non-economic, consequential and punitive damages, which were not stated in the bill, but which are a logical consequence of the bill’s language.

Regulatory estoppel that would have created ambiguity:

The bill would have created a system where supposed statements to regulators by insurance trade organizations, even if misunderstood by regulators, would bar individual insurers from interpreting the policy differently. This “regulatory estoppel” is very rare among the states and, when applied, pertains only to certain kinds of environmental contamination. This provision would have encouraged insurers to withdraw from the Oregon market rather than be held to vague, unrelated or misinterpreted comments to regulators by others. The existence of these limits on interpretation would also have made it difficult for policyholders to determine their rights and coverages under a policy from its face.

Promoted crippling increases in insurance costs for small business:

The bill would have forced insurers to raise premium rates on all small business policyholders and startups. This conclusion is supported by numerous studies that have examined the effects of bad faith insurance laws on business and other consumers in many states.

An anti-competitive “barrier to entrance”:

Liability insurance is a requirement for most businesses. By raising startup and operating costs, SB 1590 would have decreased the capital of small businesses, putting them at a competitive disadvantage.

Would have hurt taxpayers:

The bad faith bill would have created financial incentives for pursuing dubious claims. These added claims and litigation would have raised court costs and created an additional burden on taxpaying businesses and individuals who fund the court and regulatory system.

Would have created a climate of uncertainty:

In order to function and thrive, businesses need certainty. The bill would have created vague and unrealistic standards for insurance that would have taken an enormous number of cases and legal decisions to sort out. This climate of uncertainty would have been costly and would have left business owners, large and small, without a clear understanding of what their insurance policies covered, and what their duties and responsibilities were.

The bill had no clear guidelines for what policyholders or insurers should do if SB 1590 was violated.

I encourage readers to click the SB 1590 link above and read the bill for themselves. It even included an inexplicable provision bringing certain farm equipment within Underinsured Motorist (UIM) coverage law.

Will those responsible for drafting the bill be back in the 2017 session, possibly with changes? They tell me “yes”. If so, we’ll see what the bill looks like.